Hope despite budget disappointment

Investors are likely to quickly shift their attention to Chinese inflation data and domestic employment numbers, following disappointment the federal government’s budget wasn’t as tough as expected.

After the release of the federal budget last night, futures markets were tipping the S&P/ASX 200 to open 33 points higher. The Australian dollar was steady around $US1.0775. European stocks were up more than 1 per cent in early trading despite renewed concerns over European sovereign debt.

The S&P/ASX 200 Index closed 29.4 points lower at 4727.40 on Tuesday, after trading higher than 4782 in early trade. The broader All Ordinaries Index was down 26.1 points to 4805.60.

Treasurer
Wayne Swan
said the deficit in the current financial year would blow out to $49.4 billion, followed by a $22.6 billion deficit in 2011-12. Market watchers were generally unfazed by the government’s release.

AFR
AFR

HSBC chief economist Paul Bloxham said he was of the belief the government’s claim this budget would will hold down inflation “seems more rhetorical than substantial."

“The budget deficit for ’11-12 is larger than markets had expected and larger than the RBA will have written into their forecasts. On net, this is the case that they haven’t tightened the budget enough so that you get to the point where you can say it’s less inflationary than the previous set of numbers," he said.

Markets in the region were higher, with Hong Kong’s Hang Seng up 0.76 per cent and Japan’s Nikkei up 0.25 per cent.

China’s Shanghai Composite rose 0.63 per cent as the world’s second- largest economy booked an $US11.43 billion trade surplus during April, three times higher than economists’ estimates.

Ms Branwhite warned against assuming the market had already priced companies for downgrades.

“We can talk about these things and people will say, ‘Yes, we all know that downgrades are coming’, but when the actual downgrades come through, you find the share price adjusts pretty quickly."

Both OneSteel and peer BlueScope Steel have been battling currency pressures affecting margins and Australian dollar iron ore revenue. They will see little relief while the dollar holds above $US1.07.

OneSteel fell 11¢, or 5.2 per cent, to $2.02 and BlueScope fell 5¢ to $1.58.

Ms Branwhite said investors were likely to find value by concentrating on stocks that could deliver earnings rather than simply whether stocks are cheap. Value in the current environment is proving illusory. “People look at the numbers and say ‘This stock now looks cheap’ but what they’re focusing on is the P [share price] not the E [earnings]," she said.

Stocks such as
Woolworths
, although generating market concern about current performance, have earnings that are going to be more resilient, and more reliable than stocks where the market is basing value on the expectation of a rebound.

Woolworths shares were down 21¢ to $26.68, while Coles’s parent company
Wesfarmers
fell 20¢ to $33.25.

The performance of the consumer discretionary and industrials sectors have trailed materials and energy sectors since the last federal budget. “There is a good chance across the next 18 months we will find there is little in the way of recovery in this cycle," Ms Branwhite said of consumer and consumer-related stocks.

Pacific Brands and Myer have been the worst-performing non-media stocks in the consumer discretionary sector over the past year. PacBrands fell 1¢ to 68¢ and Myer was off 1¢ at $3.17 yesterday.

A broad sell-off in the financial sector left the big four banks as the market laggards.
ANZ
Banking Group fell 32¢ to $23.07,
Westpac
fell 52¢ to $23.54,
Commonwealth
Bank of Australia dropped 45¢ to $52.14 and
National Australia Bank
fell 24¢ to $27.60.

Ausbil Dexia head of equities Paul Xiradis said weakness in the banks was surprising, because they are “cum dividend" in most instances.

“I think the results last week were well digested and on balance OK, and valuation is quite supportive.

“Selling could be from offshore investors because I wouldn’t think there are too many locals selling."

Investors focused on
Foster’s
, following its demerger from Treasury Wine Estates.

Foster’s was down 95¢ at $4.53, while TWE closed at $3.36.

“On a theoretical split basis shares are down, but while shareholders might be losing a lot on Treasury Wine, they will be gaining on the theoretical price of the Foster’s Group, with a net/net difference of only about 4¢ or 5¢."